There are many other assets that could have played a diversifying role in the last sell-off. Holding cash one have probably the most obvious asset. But there are other assets or strategies that allow an adequate hedge within a portfolio. Investors that had bought out of the money puts on any equity index would have held a nice insurance against the market turmoil. Also buying dollars/yen forward would have done very well. This last position would have just taken the contrary position of carry trades that were being unwinded. Going long any swap spreads would have done very well in the presence of a big sell-off. Swap spreads have been trading very tight in the last two years due to the low market volatility. The ten year US spread has fluctuated around 50 basis points for a long time. Being long the fix side of the swap is a cheap insurance for any portfolio. Moreover a proper portfolio hedge requires some short selling. Just sell credit derivatives. Hence there are many ways to implement the “not all eggs in the same basket” principle and weather the storm nicely.

The Economist suggests holding specific assets to attain true diversification: bonds (which we have already mentioned) and weather derivatives. The last one is a very strange suggestion. Why would you want to go long/short weather derivatives? A cold snap or a week of below normal temperatures coinciding with the sell-off would have made you worse off. Just widen your imagination, not your assets.